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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
    ACT OF 1934

    For the quarterly period ended: September 30, 2013

    OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

            For the transition period from __________ to __________

                          Commission File No. 000-30219


                             CHANCELLOR GROUP, INC.
             (Exact name of Registrant as Specified in Its Charter)

           Nevada                                                87-0438647
(State or other jurisdiction of                               (I.R.S. Employer
 Incorporation or organization)                              Identification No.)

          500 Taylor Street, Plaza Two - Suite 200, Amarillo, TX 79101
          (Address of principal executive offices, including zip code)

         Issuer's Telephone Number, Including Area Code: (806) 322-2731

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted  electronically  and
posted on its corporate Web site, if any, every  Interactive  Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter)  during the  preceding 12 months (or for such shorter  period that
the  registrant  was  required  to submit  and post such  files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, a non-accelerated  filer, or a smaller reporting company. See
the definitions of "large accelerated  filer,"  "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer [ ]                        Accelerated filer [ ]

Non-accelerated filer [ ]                          Smaller reporting company [X]
(Do not check if a smaller reporting company)

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Number of shares of Common Stock outstanding as of November 14, 2013: 73,560,030

CHANCELLOR GROUP, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: 3 Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012 4 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited) 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited) 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 6. Exhibits 21 SIGNATURES 21 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted from the following consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that the following consolidated financial statements be read in conjunction with the year-end consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three and nine months ended September 30, 2013 and 2012, are not necessarily indicative of the results for the entire fiscal year or for any other period. 3
CHANCELLOR GROUP, INC. Consolidated Balance Sheets September 30, December 31, 2013 2012 ------------ ------------ (Unaudited) ASSETS Current Assets: Cash $ 910,693 $ 1,700,508 Restricted Cash 25,000 25,000 Revenue Receivable 6,486 5,500 Income Tax Receivable 12,558 7,753 Prepaid Expenses 49,000 8,284 ------------ ------------ Total Current Assets 1,003,737 1,747,045 ------------ ------------ Property: Leasehold Costs - Developed 57,580 57,580 Accumulated Amortization (28,153) (23,835) ------------ ------------ Total Property, net 29,427 33,745 ------------ ------------ Other Assets: Goodwill 427,200 -- Deposits 250 250 ------------ ------------ Total Other Assets 427,450 250 ------------ ------------ Total Assets $ 1,460,614 $ 1,781,040 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 74,826 $ 34,175 Contributions Payable 180,800 -- Accrued Expenses 1,855 169 ------------ ------------ Total Current Liabilities 257,481 34,344 ------------ ------------ Stockholders' Equity Series B Preferred Stock: $1,000 Par Value 250,000 shares authorized, none outstanding -- -- Common Stock; $.001 par value, 250,000,000 shares authorized, 73,560,030 and 69,560,030 shares issued and outstanding, respectively 73,560 69,560 Paid-in Capital 3,791,053 3,539,053 Retained Earnings (Deficit) (2,493,901) (1,829,517) ------------ ------------ Total Chancellor, Inc. Stockholders' Equity 1,370,712 1,779,096 Noncontrolling Minority Interest in Pimovi, Inc. (222,864) (32,400) Noncontrolling Minority Interest in The Fuelist, LLC 55,285 -- ------------ ------------ Total Stockholders' Equity 1,203,133 1,746,696 ------------ ------------ Total Liabilities and Stockholders' Equity $ 1,460,614 $ 1,781,040 ============ ============ See Notes to Unaudited Consolidated Financial Statements 4
CHANCELLOR GROUP, INC. Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited) Three months ended Nine months ended September 30, September 30, ------------------------------ ----------------------------- 2013 2012 2013 2012 ------------ ------------ ------------ ------------ Revenues - Net of Royalties Paid: Oil $ 13,464 $ 22,849 $ 43,285 $ 67,196 Other Operating Income -- -- 53,337 18,750 ------------ ------------ ------------ ------------ Revenues 13,464 22,849 96,622 85,946 ------------ ------------ ------------ ------------ Operating Expenses: Lease Operating Expenses 8,446 8,120 24,253 36,865 Severance Taxes 621 1,053 1,991 2,819 Other Operating Expenses 8,165 -- 15,365 28,050 Investment Professional and Consulting Expenses 192,230 -- 526,471 -- Administrative Expenses 136,710 136,933 401,719 408,462 Depreciation and Amortization 1,439 1,194 4,318 3,580 ------------ ------------ ------------ ------------ Total Operating Expenses 347,611 147,300 974,117 479,776 ------------ ------------ ------------ ------------ (Loss) From Operations (334,147) (124,451) (877,495) (393,830) ------------ ------------ ------------ ------------ Other Income: Interest Income 309 947 1,224 3,346 Other Income 500 -- 500 -- ------------ ------------ ------------ ------------ Total Other Income 809 947 1,724 3,346 ------------ ------------ ------------ ------------ Financing Charges: Bank Fees Amortization 376 283 1,386 3,095 ------------ ------------ ------------ ------------ Total Financing Charges 376 283 1,386 3,095 ------------ ------------ ------------ ------------ Loss Before Provision for Income Taxes (333,714) (123,787) (877,157) (393,579) Provision for Income Taxes (Benefit) -- -- -- -- ------------ ------------ ------------ ------------ Net (Loss) (333,714) (123,787) (877,157) (393,579) Net Loss attributable to noncontrolling interest in Pimovi, Inc. 60,110 -- 190,464 -- Net Loss attributable to noncontrolling interest in The Fuelist, LLC 22,309 -- 22,309 -- ------------ ------------ ------------ ------------ Net (Loss) attributable to Chancellor Group, Inc. Shareholders $ (251,294) $ (123,787) $ (664,384) $ (393,579) ============ ============ ============ ============ Net Loss per Share (Basic and Fully Diluted) $ (*) $ (*) $ (*) $ (*) ============ ============ ============ ============ Weighted Average Number of Common Shares Outstanding 72,494,813 69,560,030 71,439,151 69,022,804 ============ ============ ============ ============ ---------- * Less than $0.01 per share See Notes to Unaudited Consolidated Financial Statements 5
CHANCELLOR GROUP, INC. Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2013 and 2012 (Unaudited) September 30, September 30, 2013 2012 ------------ ------------ Cash Flows from Operating Activities: Net (Loss) attributable to Chancellor Group, Inc. Shareholders $ (664,384) $ (393,579) Adjustments to Reconcile Net (Loss) to Net Cash: Loss from Noncontrolling Interest in Pimovi, Inc. (190,464) -- Loss from Noncontrolling Interest in The Fuelist, LLC (22,309) -- Depreciation and Amortization 4,318 3,580 Stock Compensation 100,000 42,600 Decrease in Operating Assets (46,507) 46,370 Increase (Decrease) in Operating Liabilities 13,331 (142,384) ------------ ------------ Net Cash (Used by) Operating Activities (806,015) (443,413) ------------ ------------ Cash Flows from Investing Activites -- -- ------------ ------------ Cash Flows from Financing Activities: Capital Contributions Received 16,200 -- ------------ ------------ Net Cash Provided by Financing Activities 16,200 -- ------------ ------------ Net (Decrease) in Cash and Restricted Cash (789,815) (443,413) Cash and restricted cash at the Beginning of the Period 1,725,508 2,336,776 ------------ ------------ Cash and restricted cash at the End of the Period $ 935,693 $ 1,893,363 ============ ============ Supplemental Disclosures of Cash Flow Information: Interest Paid $ -- $ -- ============ ============ Income Taxes Paid $ -- $ -- ============ ============ Non Cash Investing and Financing Activities: Contributions Payable related to Acquisition $ 271,200 $ -- ============ ============ Common Stock issued for Fuelist, LLC Acquisition $ 156,000 $ -- ============ ============ Goodiwll from Fuelist, LLC Acquisition $ 427,200 $ -- ============ ============ See Notes to Unaudited Consolidated Financial Statements 6
CHANCELLOR GROUP, INC. Notes to Unaudited Consolidated Financial Statements September 30, 2013 NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION Chancellor Group, Inc. ("our", "we", or "Chancellor") was incorporated in the state of Utah on May 2, 1986, and then, on December 30, 1993, dissolved as a Utah corporation and reincorporated as a Nevada corporation. Chancellor's primary business purpose is to engage in the acquisition, exploration and development of oil and gas production. On March 26, 1996, Chancellor's corporate name was changed from Nighthawk Capital, Inc. to Chancellor Group, Inc. Chancellor's corporate office was moved to Amarillo, Texas in early 2012. On November 16, 2012, a certificate of incorporation was filed with the state of Delaware for the formation of Pimovi, Inc. ("Pimovi"), a majority-owned subsidiary of Chancellor, and with which separate company financial statements are consolidated with Chancellor's consolidated financial statements beginning for the fourth quarter of 2012. Chancellor owns 61% of the equity of Pimovi in the form of Series A Preferred Stock, therefore Chancellor maintains significant financial control. As of September 30, 2013, Pimovi had not commenced principal operations and had no sales or revenues for 2012 or through September 30, 2013, therefore Pimovi is considered a "development-stage enterprise". The primary business purpose of Pimovi relates largely to technology and mobile application fields, including development of proprietary consumer algorithms, creating user photographic and other activity records, First Person Video Feeds and other such activities related to mobile and computer gaming. In March 2013, Pimovi, Inc. was reincorporated in Nevada. On August 15, 2013, Chancellor Group, Inc. entered into a binding term sheet (the "Term Sheet") with The Fuelist, LLC, a California limited liability company ("Fuelist"), and its founders, Matthew Hamilton, Eric Maas and Thomas Rand-Nash (together, the "Founders"), pursuant to which Chancellor agreed to acquire a 51% ownership interest in Fuelist, therefore Chancellor maintains significant control at September 30, 2013. As consideration for the ownership interest, Chancellor will contribute to Fuelist a total of $271,200 in cash payable in 12 monthly installments of $22,600, beginning in August 2013. As additional consideration for the ownership interest, Chancellor contributed a total of 2,000,000 shares of newly issued common stock to Fuelist on August 19, 2013, valued at $156,000, or $0.078 per share. As of September 30, 2013, Fuelist had not commenced principal operations and had no sales or operating revenues through September 30, 2013, therefore Fuelist is considered a "development-stage enterprise". The primary purpose of Fuelist is the development of a data-driven mobile and web technology platform that leverages extensive segment expertise and big data analysis tools to value classic vehicles. These tools will enable users to quickly find values, track valuations over time, and to identify investment and arbitrage opportunities in this lucrative market. OPERATIONS Chancellor is licensed by the Texas Railroad Commission as an oil and gas producer and operator. Chancellor and its wholly-owned subsidiaries, Gryphon Production Company, LLC and Gryphon Field Services, LLC, own 5 oil wells in Gray County, Texas, of which 1 is a water disposal well. As of September 30, 2013, approximately 4 oil wells are actively producing. We produced a total of 134 and 479 barrels of oil in the three and nine months ended September 30, 2013, respectively, and a total of 72 and 779 barrels of oil in the three and nine months ended September 30, 2012, respectively. The oil is light sweet crude. Both Pimovi and Fuelist were development stage enterprises as of September 30, 2013, with no significant operations other than the ongoing development of their respective technologies described above. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Chancellor and its subsidiaries have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q and in accordance with US GAAP. Accordingly, these consolidated financial statements do not include all of the information and footnotes required by US GAAP for annual consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Chancellor Group, Inc. Annual Report on Form 10-K for the year ended December 31, 2012. These accompanying consolidated financial statements include the accounts of Chancellor and its wholly-owned subsidiaries: Gryphon Production Company, LLC, and Gryphon Field Services, LLC. These entities are collectively hereinafter referred to as "the Company". Beginning in the fourth quarter 2012, the accompanying consolidated financial statements include the accounts of 7
Chancellor's majority-owned subsidiary, Pimovi, Inc., with which Chancellor owns 61% of the equity of Pimovi and maintains significant financial control. Beginning in the third quarter 2013, the accompanying consolidated financial statements also include Chancellor's majority-owned subsidiary, The Fuelist, LLC, which Chancellor owns 51% of the equity of Fuelist and maintains significant financial control. All material inter-company accounts and transactions have been eliminated in the consolidated financial statements. The consolidated financial statements are unaudited, but, in management's opinion, include all adjustments (which, unless otherwise noted, include only normal recurring adjustments) necessary for a fair presentation of such financial statements. Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2013. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Chancellor Group, Inc. and its wholly-owned subsidiaries: Gryphon Production Company, LLC, and Gryphon Field Services, LLC. As of December 31, 2012 and for the nine months ended September 30, 2013, these consolidated financial statements also include Chancellor's majority-owned subsidiary, Pimovi, Inc., of which Chancellor owns 61% of the equity. As of September 30, 2013 and for the three months ended September 30, 2013, these consolidated financial statements also include Chancellor's majority-owned subsidiary, The Fuelist, LLC, of which Chancellor owns 51% of the equity. These entities are collectively hereinafter referred to as "the Company". Any inter-company accounts and transactions have been eliminated. ACCOUNTING YEAR The Company employs a calendar accounting year. The Company recognizes income and expenses based on the accrual method of accounting under generally accepted accounting principles. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRODUCTS AND SERVICES, GEOGRAPHIC AREAS AND MAJOR CUSTOMERS The Company plans to continue to operate its domestic oil and gas properties, located in Gray County in Texas, and possibly to acquire additional producing oil and gas properties. The Company's major customers, to which the majority of its oil production is sold, are Plains Marketing and ExxonMobil. As of September 30, 2013, both Pimovi and Fuelist were in the development stage of operations pursuing the development of their respective technologies, with no significant products, services or major customers. NET LOSS PER SHARE The net loss per share is computed by dividing the net loss by the weighted average number of shares of common outstanding. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive and would increase the earnings or decrease loss per share. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of six months or less as cash equivalents. The Company had no cash equivalents as of September 30, 2013 and December 31, 2012. CONCENTRATION OF CREDIT RISK Some of the Company's operating cash balances are maintained in accounts that currently exceed federally insured limits. The Company believes that the financial strength of depositing institutions mitigates the underlying risk of loss. To date, these concentrations of credit risk have not had a significant impact on the Company's financial position or results of operations. 8
RESTRICTED CASH Included in restricted cash at September 30, 2013 and December 31, 2012 are deposits totaling $25,000, in the form of bond issued to the Railroad Commission of Texas as required for the Company's oil and gas activities. ACCOUNTS RECEIVABLE The Company reviews accounts receivable periodically for collectibles, establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. An allowance for doubtful accounts was not considered necessary or recorded at September 30, 2013 and December 31, 2012. PREPAID EXPENSES Certain expenses, primarily investment professional and consulting fees, have been prepaid and will be used within one year. GOODWILL Goodwill represents the cost in excess of the fair value of net assets of the acquisition. Goodwill is not amortized but is subject to periodic testing for impairment. The Company tests goodwill for impairment using a two-step process. The first step tests for potential impairment, while the second step measures the amount of the impairment, if any. The Company performs the annual impairment test during the last quarter of each year. PROPERTY Property and equipment are recorded at cost and depreciated under the straight-line method over the estimated useful life of the equipment. The estimated useful life of leasehold costs, equipment and tools ranges from five to seven years. The useful life of the office building and warehouse is estimated to be twenty years. OIL AND GAS PROPERTIES The Company follows the successful efforts method of accounting for its oil and gas activities. Under this accounting method, costs associated with the acquisition, drilling and equipping of successful exploratory and development wells are capitalized. Geological and geophysical costs, delay rentals and drilling costs of unsuccessful exploratory wells are charged to expense as incurred. The carrying value of mineral leases is depleted over the minimum estimated productive life of the leases, or ten years. Undeveloped properties are periodically assessed for possible impairment due to un-recoverability of costs invested. Cash received for partial conveyances of property interests is treated as a recovery of cost and no gain or loss is recognized. DEPLETION The carrying value of the mineral leases is depleted over the minimum estimated productive life of the leases, or ten years. LONG-LIVED ASSETS The Company assesses potential impairment of its long-lived assets, which include its property and equipment and its identifiable intangibles such as deferred charges, under the guidance Topic 360 "PROPERTY, PLANT AND EQUIPMENT" in the Accounting Standards Codification (the "ASC"). The Company must continually determine if a permanent impairment of its long-lived assets has occurred and write down the assets to their fair values and charge current operations for the measured impairment. ASSET RETIREMENT OBLIGATIONS The Company has not recorded an asset retirement obligation (ARO) in accordance with ASC 410. Under ASC 410, a liability should be recorded for the fair value of an asset retirement obligation when there is a legal obligation associated with the retirement of a tangible long-lived asset, and the liability can be reasonably estimated. The associated asset retirement costs should also be capitalized and recorded as part of the carrying amount of the related oil and gas properties. Management believes that not recording an ARO liability and asset under ASC 410 is immaterial to the consolidated financial statements. INCOME TAXES Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more 9
likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. REVENUE RECOGNITION The Company recognizes revenue when a product is sold to a customer, either for cash or as evidenced by an obligation on the part of the customer to pay. FAIR VALUE MEASUREMENTS AND DISCLOSURES The Company estimates fair values of assets and liabilities which require either recognition or disclosure in the financial statements in accordance with FASB ASC Topic 820 "FAIR VALUE MEASUREMENTS". There is no material impact on the September 30, 2013 consolidated financial statements related to fair value measurements and disclosures. Fair value measurements include the following levels: Level 1: Quoted market prices in active markets for identical assets or liabilities. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal agency securities and federal agency mortgage-backed securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities. Level 3: Unobservable inputs that are not corroborated by market data. Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's financial instruments, including cash and cash equivalents, accounts receivable and accounts payable and accrued expenses as reported in the accompanying consolidated balance sheet, approximates fair values, due to their short-term nature. EMPLOYEE STOCK-BASED COMPENSATION Compensation expense is recognized for performance-based stock awards if management deems it probable that the performance conditions are or will be met. Determining the amount of stock-based compensation expense requires us to develop estimates that are used in calculating the fair value of stock-based compensation, and also requires us to make estimates of assumptions including expected stock price volatility which is derived based upon our historical stock prices. BUSINESS COMBINATIONS The Company accounts for business combinations in accordance with FASB ASC Topic 805 "BUSINESS COMBINATIONS". This standard modifies certain aspects of how the acquiring entity recognizes and measures the identifiable assets, the liabilities assumed and the goodwill acquired in a business combination. The Company entered into a business combination with The Fuelist, LLC on August 15, 2013 (See Note 9 for further disclosure). VARIABLE INTEREST ENTITIES The Company complies with the accounting guidance related to consolidation of variable interest entities ("VIEs") that requires a reporting entity to determine if a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards approach, to a qualitative approach based on which variable interest holder has the power to direct the economic performance related activities of the VIE as well as the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE. This guidance requires the primary beneficiary assessment to be performed on an ongoing basis and also requires enhanced disclosures that will provide more transparency about a company's involvement in a VIE. The Company did not have any VIEs that required consolidation in these financial statements during the nine months ended September 30, 2013. 10
RECENT ACCOUNTING PRONOUNCEMENTS In July 2013, FASB issued ASU No. 2013-11, INCOME TAXES (TOPIC 740): PRESENTATION OF AN UNRECOGNIZED TAX BENEFIT WHEN A NET OPERATING LOSS CARRYFORWARD, A SIMILAR TAX LOSS, OR A TAX CREDIT CARRYFORWARD EXISTS. This ASU is effective for interim and annual periods beginning after December 15, 2013. This update standardizes the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Management does not anticipate that the accounting pronouncement will have any material future effect on our consolidated financial statements. There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries, and are not expected to have a material impact on the Company's financial position, results of operations or cash flows. NOTE 2. INCOME TAXES Deferred income taxes are recorded for temporary differences between financial statement and income tax basis. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax basis. Deferred tax assets are recognized for temporary differences that will be deductible in future years' tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years' tax returns. At September 30, 2013, the Company had a federal net operating loss carry-forward of approximately $2,417,020. A deferred tax asset of approximately $483,404 has been partially offset by a valuation allowance of approximately $479,864 due to federal net operating loss carry-back and carry-forward limitations. At September 30, 2013, the Company also had approximately $3,539 in deferred income tax liability attributable to timing differences between federal income tax depreciation, depletion and book depreciation, which has been offset against the deferred tax asset related to the net operating loss carry-forward. Management evaluated the Company's tax positions under FASB ASC No. 740 "UNCERTAIN TAX POSITIONS," and concluded that the Company had taken no uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years before 2009. NOTE 3. STOCKHOLDERS' EQUITY PREFERRED STOCK The Company has authorized 250,000 shares, par value $1,000 per share, of convertible Preferred Series B stock ("Series B"). Each Series B share is convertible into 166.667 shares of the Company's common stock upon election by the stockholder, with dates and terms set by the Board. No shares of Series B preferred stock have been issued. COMMON STOCK The Company has 250,000,000 authorized shares of common stock, par value $.001, with 73,560,030 shares issued and outstanding as of September 30, 2013. During the nine months ended September 30, 2013, Chancellor issued 4,000,000 shares of its common stock, including: (1) 1,000,000 shares issued on February 25, 2013 to a new investor relations consultant related to a 12 month agreement, (2) 1,000,000 shares issued on March 25, 2013 to the co-founder of Pimovi, Inc. related to Chancellor's acquisition of 61% of the equity of Pimovi, and (3) 2,000,000 shares issued on August 19, 2013 to The Fuelist, LLC. as partial consideration of Chancellor's acquisition of 51% of the ownership interest of Fuelist (see Note 9 for further information). STOCK BASED COMPENSATION For the three and nine months ending September 30, 2013, the Company recognized $15,000 and $80,000, respectively, in consulting fees expense, which is recorded in general and administrative expenses, and as of September 30, 2013 has recorded $20,000 in prepaid expense, which is recorded in current assets, all related to this stock issued. 11
WARRANTS The Company currently has outstanding warrants expiring December 31, 2014 to purchase an aggregate of 6,000,000 shares of common stock; these warrants consist of warrants to purchase 2,000,000 shares at an exercise price of $0.025 per share, and warrants to purchase 4,000,000 shares at an exercise price of $0.02 per share. In July 2009, the Company issued additional warrants expiring June 30, 2014 to purchase an aggregate of 500,000 shares of common stock at an exercise price of $0.125 per share. In June 2010, the Company issued additional warrants expiring June 30, 2015 to purchase an aggregate of 420,000 shares of common stock at an exercise price of $0.125 per share. On September 30, the Company had the following outstanding warrants: Exercise Weighted Remaining Price times Average Exercise Number of Contractual Life Number of Exercise Price Shares (in years) Shares Price ----- ------ ---------- ------ ----- $0.025 2,000,000 1.25 $ 50,000 $0.020 4,000,000 1.25 $ 80,000 $0.125 500,000 .75 $ 62,500 $0.125 420,000 1.75 $ 52,500 --------- -------- 6,920,000 $245,000 $0.035 ========= ======== Weighted Average Remaining Number of Exercise Contractual Life Warrants Shares Price (in years) -------- ------ ----- ---------- Outstanding at January 1, 2013 6,920,000 $0.035 --------- ------ Issued -- -- Exercised -- -- Expired/Cancelled -- -- --------- ------ Outstanding at September 30, 2013 6,920,000 $0.035 1.50 --------- ------ ---- Exercisable at September 30, 2013 6,920,000 $0.035 1.50 ========= ====== ==== NOTE 4. PROPERTY A summary of fixed assets at: Balance Balance December 31, September 30, 2012 Additions Deletions 2013 -------- --------- --------- -------- Leasehold Costs - Developed $ 57,580 $ -- $ -- $ 57,580 -------- -------- -------- -------- Total Property $ 57,580 $ -- $ -- $ 57,580 ======== ======== ======== ======== Less: Accumulated Amortization $ 23,835 $ 4,318 $ -- $ 28,153 -------- -------- -------- -------- Total Property, net $ 33,745 $ 4,318 $ -- $ 29,427 ======== ======== ======== ======== NOTE 5. CONTINGENT LIABILITY On March 31, 2011, Dennis Caldwell filed a lawsuit against Chancellor's subsidiary, Gryphon Production Company, LLC, in the 223rd District Court of Gray County, Texas, for an alleged breach of the April 1, 2007, purchase and sale agreement between Gryphon and Caldwell Production Co., Inc. Caldwell contended that Gryphon did not pay for the oil in the storage tanks in the April 2007 transaction. The plaintiff alleged breach of contract, conversion and fraud and sought damages of $451,999 as contract damages, pre-judgment and post-judgment interest, exemplary damages, attorney fees, and court costs. On March 8, 2013, 12
the Judge of the 223rd District Court entered Final Judgment that Caldwell takes nothing by his suit. Caldwell filed a motion for new trial. The motion for new trial has since been overruled by operation of law. Thereafter, Caldwell filed a "conspiracy" suit against Gryphon and other oil companies, in the 223rd District Court of Gray County, Texas, alleging that certain mistaken payments by Exxon to Caldwell were made to harm Caldwell. On July 29, 2013, the Judge of the 223rd District Court granted Gryphon's motion to dismiss the case under Texas' baseless cause of action rule, and ordered Caldwell to pay Gryphon's attorney fees and costs in the amount of $4,880.00. Caldwell filed a motion for new trial, and paid the $4,880.00 to Gryphon. NOTE 6. CONTRACTUAL OBLIGATIONS On February 25, 2013, the Company entered into a twelve month agreement with a new investor relations consultant, which pays the consultant a fee of $9,000 monthly for the period from February 2013 through July 2013. In addition, the Company granted 1,000,000 shares of common stock to the consultant upon execution of the agreement. The Company recognized $27,500 and $76,000 in consulting fees related to this agreement for the three and nine months ending September 30, 2013 and also still has $38,000 in related prepaid expenses in current assets as of September 30, 2013. NOTE 7. ACCUMULATED COMPENSATED ABSENCES It is the Company's policy to permit employees to accumulate a limited amount of earned but unused vacation, which will be paid to employees upon separation from the Company's service. The cost of vacation and sick leave is recognized when payments are made to employees. These amounts are immaterial and not accrued. NOTE 8. RELATED PARTY TRANSACTIONS The Company has used the management and consulting services of a consulting company owned by the Chairman of the Board. For the three and nine months ending September 30, 2013, the Company has paid $27,000 and $81,000, respectively for those services. During the three and nine months ending September 30, 2012, the Company paid $27,000 and $77,000, respectively for those services. NOTE 9. BUSINESS COMBINATION On August 15, 2013, Chancellor entered into a binding term sheet with The Fuelist, LLC, a California limited liability company ("Fuelist"), and its founders, pursuant to which Chancellor acquired a 51% ownership interest in Fuelist. As consideration for the 51% ownership interest in Fuelist, Chancellor agreed to contribute to Fuelist a total of $271,200 in cash payable in 12 monthly installments of $22,600. As additional consideration for the ownership interest, Chancellor contributed a total of 2,000,000 shares of newly issued common stock to Fuelist on August 19, 2013, valued at $156,000, or $0.078 per share. Also in the term sheet, the 2,000,000 shares of Chancellor common stock are deemed the property of the Founders irrespective of any future sales of the Company or outcomes, and in the event of any sale of the Company to a third party, the Founder's shares paid as part-consideration to the Company for the purchase of Chancellor's 51% shall remain the property of the Founders and those Founder's shares shall be transferred to the Founders before, or as part of, the closing of any such sale in the future to a third party. Chancellor determined that the acquisition of its majority-owned interest in Fuelist constitutes a business combination as defined by FASB ASC Topic 805, Business Combinations. Accordingly, the net assets acquired were recorded upon acquisition at their estimated fair values. Fair values were determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. These fair value estimates were considered preliminary, and are subject to change for up to one year after the closing date of the acquisition if any additional information relative to closing dated fair values becomes available. The initial fair value of assets acquired and liabilities assumed in the purchase has yielded little to no value as such all the proceeds are currently allocated to goodwill as shown below: Purchase Price: Issuance of 2,000,000 shares of common stock $156,000 Contributions payable 271,200 -------- Total $427,200 ======== 13
Subsequent to the purchase, Chancellor paid $90,400 towards the contributions payable resulting in $180,800 outstanding as of September 30, 2013. The Company is finalizing this transaction but did not identify any intangible items which qualify for separate disclosure or accounting apart from goodwill. NOTE 10. SUBSEQUENT EVENTS Events occurring after September 30, 2013 were evaluated through the date the Form 10Q was issued, in compliance FASB ASC Topic 855 "Subsequent Events", to ensure that any subsequent events that met the criteria for recognition and/or disclosure in this report have been included. 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Throughout this report, we make statements that may be deemed "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that Chancellor plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report. We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and other risks described herein, the effects of existing or continued deterioration in economic conditions in the United States or the markets in which we operate, and acts of war or terrorism inside the United States or abroad. BACKGROUND In April 2007 we commenced operations with what were 84 producing wells in Gray and Carson counties, Texas. On July 22, 2008, we entered into an Agreement, effective as of June 1, 2008 with Legacy Reserves Operating LP ("Legacy") for the sale of our oil and gas wells in Carson County, Texas, representing approximately 84% of our oil and gas production at that time. In 2010, the Company acquired three additional properties in Hutchinson County including approximately 16 wells for a purchase price of approximately $150,000. In 2011, the Company continued our operational and restoration programs and the production capacity from our 67 actively producing wells in Gray and Hutchinson counties. Pursuant to the terms of the Purchase and Sale Agreement dated October 18, 2011, LCB purchased all of Gryphon's right, title and interest in certain leases, wells, equipment, contracts, data and other designated property, effective December 31, 2011. The assets sold to LCB approximated 82% of the Company's consolidated total assets as of September 30, 2011 and contributed approximately 95% and 77%, respectively, of the Company's consolidated gross revenues and total expenses for the nine months ended September 30, 2011. Under the terms of the Purchase and Sale Agreement, LCB paid Gryphon $2,050,000 in cash, subject to certain adjustments as set forth in the Purchase and Sale Agreement. Since the sale of substantially all of the assets of Gryphon to LCB, the Company has continued to maintain a total of four (4) producing oil wells and one (1) water disposal well. Gryphon also retains an operator's license with the Texas Railroad Commission and continues to operate the Hood Leases itself. The proceeds from the asset sale to LCB are being used to provide working capital to Chancellor and for future corporate purposes, including but not limited to possible acquisitions, including new business ventures outside of the oil and gas industry, such as with Pimovi, Inc. commencing during the fourth quarter of 2012 and The Fuelist, LLC. commencing during the third quarter of 2013. On November 16, 2012, a certificate of incorporation was filed with the state of Delaware for the formation of Pimovi, Inc. ("Pimovi"), a new majority-owned subsidiary of Chancellor, the separate company financial statements of which are consolidated with Chancellor's consolidated financial statements beginning for the fourth quarter of 2012. Subsequently on January 11, 2013 the final binding term sheet was signed by Chancellor summarizing the principal terms, conditions and formal establishment of Pimovi by its two "Co-Founders", Chancellor and Kasian Franks. Under the agreement, Chancellor has agreed to provide the initial funding of $250,000 over a period of up to eight months, in consideration of the receipt of 61% of the equity of Pimovi in the form of Series A Preferred Stock. Kasian Franks, whom is also the Chief Scientific Officer of Pimovi, has agreed to contribute certain intellectual property related to its business in consideration for receipt of the remaining equity in Pimovi in the form of common stock. The primary business purpose of Pimovi relates largely to technology and mobile application fields, including development of proprietary consumer algorithms, creating user photographic and other activity records, First Person Video Feeds and other such activities related to mobile and computer gaming. In March 2013, Pimovi was reincorporated in Nevada. On August 15, 2013, Chancellor entered into a binding term sheet with The Fuelist, LLC, a California limited liability company ("Fuelist"), and its founders, Matthew Hamilton, Eric Maas and Thomas Rand-Nash, pursuant to which Chancellor agreed to acquire a 51% ownership interest in Fuelist. As consideration for the ownership interest, Chancellor will contribute to Fuelist a total of $271,200 in cash payable in 12 monthly installments of $22,600, beginning in August 2013. As additional consideration for the ownership interest, Chancellor contributed a total of 2,000,000 shares of newly issued common stock to Fuelist on August 19, 2013, valued at $156,000, or $0.078 per share. The primary business purpose of Fuelist relates largely to developing a data-driven mobile and web technology platform that leverages extensive segment expertise and big data analysis tools to value classic vehicles. These tools 15
enable users to quickly find values, track valuations over time and to identify investment and arbitrage opportunities in this lucrative market. The Term Sheet is binding by its terms but the parties intend to enter into more detailed transaction documents consistent with the Term Sheet. Our common stock is quoted on the Over-The-Counter market and trades under the symbol CHAG.OB. As of November 14, 2013, there were 73,560,030 shares of our common stock issued and outstanding. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2012. PRODUCTION: During the three months ended September 30, 2013, we produced and sold 134 barrels of oil, generating $13,464 in gross revenues net of royalties paid, with a one month lag in receipt of revenues for the prior months sales, as compared with 72 barrels of oil, generating $6,308 in gross revenues net of royalties paid during the same period in 2012. During the three months ended September 30, 2012, the Company also recognized additional revenues from Exxon of $16,541 related to prior production of 178 barrels of oil. The revised estimate related to division orders on the J.A. Hood lease. We had 4 wells actually producing oil at September 30, 2013 and 2012. The Company has continued to maintain a total of four (4) producing oil wells and one (1) water disposal well. Gryphon will also retain an operator's license with the Texas Railroad Commission and continue to operate the Hood Leases itself. The following table summarizes our production volumes and average sales prices for the three months ended September 30: 2013 2012 -------- -------- Oil Sales: Oil Sales (Bbl) 134 72 Average Sales Price: Oil, per Bbl $100.26 $ 87.79 The increase in revenues from oil, excluding the $16,541 of additional revenues from Exxon in 2012 noted above, during the three months ended September 30, 2013 (as compared to the three months ended September 30, 2012) resulted from the timing of oil deliveries compared to the same period a year ago and an increase in price. DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and amortization of property and equipment increased $247, or approximately 21% in the three months ended September 30, 2013 compared to the same period in 2012. This increase was primarily attributable to an increase in capitalized well equipment. OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During the three months ended September 30, 2013, our operating expenses increased approximately $200,000 compared to the same period in 2012 primarily due to approximately $192,000 of investment related professional and consulting expenses were incurred by Pimovi, Inc. and Fuelist, LLC, as reported in the consolidated statement of operations for the three months ended September 30, 2013. Approximately $154,000 of this expense incurred was for the financing of Pimovi's general business purpose related to the initial development of technology and mobile applications fields. Pimovi was started in the fourth quarter of 2012 and therefore did not have any activity during the third quarter of 2012. Approximately $38,000 of this expense incurred was for the financing of Fuelist's general business purpose related to the initial development of technology and mobile applications fields. Fuelist was started in 2013 therefore did not have any activity during the third quarter of 2012. Operating expenses related to our oil production decreased approximately $4,000 due to decreased well workover and maintenance expenses incurred during the third quarter of 2013 compared to the same period in 2012. During the three months ended September 30, 2013, our general and administrative expenses decreased $3,600, or approximately 3% compared to same period in 2012. Significant components of these expenses include professional and consulting fees, travel expenses, and insurance expense. Professional and consulting fees increased approximately $6,000, or approximately 6%, during the three months ending September 30, 2013 compared to the same period in 2012, primarily the result of increased professional and legal expense. Travel expenses decreased approximately $6,793 compared to same period in 2012, primarily the result of reduced travel expenses incurred in the three months ended September 30, 2013. Insurance decreased approximately $6,159, or approximately 49% during the three months ending September 30, 2013 compared to the same period in 2012, primarily the result of reduced premiums. 16
NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2012. PRODUCTION: During the nine months ended September 30, 2013, we produced and sold 479 barrels of oil, generating $43,285 in gross revenues net of royalties paid, with a one month lag in receipt of revenues for the prior months sales, as compared with 779 barrels of oil generating $67,196 in gross revenues net of royalties paid during the same period in 2012. During the nine months ended September 30, 2013, the Company also recorded other income of $53,337 related to the settlement of Cause 37053, related to production proceeds from 2009 through 2011 from properties previously owned and operated by the Company which had been previously paid to another party in error. During the same period in 2012, pursuant to the transition services agreement related to the asset sale to LCB, the Company recorded $18,750 in other income for operating the wells sold to LCB through February 15, 2012. We had 4 wells actually producing oil at September 30, 2013 and 2012. The Company has continued to maintain a total of four (4) producing oil wells and one (1) water disposal well. Gryphon will also retain an operator's license with the Texas Railroad Commission and continue to operate the Hood Leases itself. The following table summarizes our production volumes and average sales prices for the nine months ended September 30: 2013 2012 -------- -------- Oil Sales: Oil Sales (Bbl) 479 779 Average Sales Price: Oil, per Bbl $90.40 $86.24 The decrease in revenues of oil during the nine months ended September 30, 2013 (as compared to the period ended September 30, 2012) resulted primarily from the revenues from 2012 being higher as a result of the sale of approximately 382 barrels of oil which was in tanks at the date of the sale to LCB, resulting in approximately $30,650 in revenues. DEPRECIATION AND AMORTIZATION: Expense recognized for depreciation and amortization of property and equipment increased $738, or approximately 20% in the nine months ended September 30, 2013 compared to the same period in 2012. This increase was primarily attributable to additional capitalized well costs. OPERATING EXPENSES AND ADMINISTRATIVE EXPENSES: During the nine months ended September 30, 2013, our operating expenses increased $494,000, or approximately 103%, primarily due to approximately $526,000 of investment related professional and consulting expenses were incurred by Pimovi, Inc. and Fuelist, LLC, as reported in the consolidated statement of operations for the nine months ended September 30, 2013. Approximately $488,000 of this expense incurred was for the financing of Pimovi's general business purpose related to the initial development of technology and mobile applications fields. Pimovi was started in the fourth quarter of 2012 and therefore did not have any activity during the first nine months of 2012. Approximately $38,000 of this expense incurred was for the financing of Fuelist's general business purpose related to the initial development of technology and mobile applications fields. Fuelist was started in 2013 therefore did not have any activity during the first nine months of 2012. Administrative expenses decreased $4,816, or approximately 2% compared to same period in 2012. Significant components of these expenses include professional and consulting fees, travel expenses, and insurance expense. Professional and consulting fees increased approximately $48,500, or approximately 19%, during the nine months ending September 30, 2013 compared to the same period in 2012, primarily the result of increased consulting fees and investor relations expense. Travel expenses decreased approximately $14,886 compared to same period in 2012, primarily the result of reduced travel expenses incurred in the nine months ended September 30, 2013. Insurance decreased approximately $14,886, or approximately 44% during the nine months ending September 30, 2013 compared to the same period in 2012, due primarily to the sale of substantially all of our producing wells effective December 1, 2011 to LCB and the decrease in insurance coverage requirements after we discontinued the operations of the sold properties in early 2012. OVERALL: During the nine months ended September 30, 2013, we continued with the ongoing production, maintenance and enhancements of our 4 producing wells in Gray county. As a result of these efforts, our gross revenues from oil production for the nine months ended September 30, 2013 were $43,285. During the nine months ended September 30, 2013, the Company also recorded other income of $53,337 related to the settlement of Cause 37053, related to production proceeds from 2009 through 2011 from properties previously owned and operated by the Company which had been previously paid to another party in error. The management of the Company has expended a large amount of time and resources in exploring other acquisitions and business opportunities, primarily outside of the oil and gas industry. During the fourth quarter of 2012 Chancellor entered into an agreement to acquire 61% of Pimovi Inc., a new majority-owned subsidiary of Chancellor beginning in the fourth quarter of 2012. Pimovi's primary focus is creating new methods for recording activities, along with editing and assembling such records in a proprietary format, including First Person Video Feeds for sporting and other events that present the different points of views of the athletes and other participants. During the nine months ended September 30, 2013, Pimovi incurred a loss of $448,370, mostly related to consulting fees and general and administrative expenses, as it begins to develop its product line. Chancellor recorded a $297,906 loss from Pimovi during first nine months of 2013, representing its 61% share of Pimovi. During the third quarter of 2013, 17
Chancellor acquired a 51% ownership interest in The Fuelist, LLC. During the period from August 15, 2013 through September 30, 2013, Fuelist incurred a loss of $45,528, mostly related to consulting fees and general and administrative expenses, as it begins to develop its technologies. Chancellor recorded a $23,519 loss from Fuelist during for the period ending September 30, 2013. Therefore, the Company reported a consolidated net loss of $664,384 during the first nine months of 2013, compared to a net loss of $393,579 reported for the same period in 2012. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW: The following table highlights certain information relation to our liquidity and capital resources at: September 30, December 31, 2013 2012 ---------- ---------- Working Capital $ 746,256 $1,712,701 Current Assets 1,003,737 1,747,045 Current Liabilities 257,481 34,344 Stockholders' Equity 1,203,133 1,746,696 Our working capital at September 30, 2013 decreased by $966,445 or approximately 56%, from December 31, 2012, primarily from the loss from operations during first nine months of 2013. Current assets decreased by decreased by $743,308, or approximately 43%, while current liabilities increased $223,137 or approximately 650%, primarily as a result of operating losses incurred during the first nine months of 2013 and funding of investments in Pimovi and Fuelist. Our capital resources consist primarily of cash from operations and permanent financing, in the form of capital contributions from our stockholders. As of September 30, 2013, the Company had $910, 693 of unrestricted cash on hand. CASH FLOW: Net cash used during the nine months ended September 30, 2013 was $789,815 compared to net cash used of $443,413 during same period in 2012. The most significant factor causing the increase in net cash used during the first nine months of 2013 compared to the same period last year relates to the continued funding of cash to Pimovi, Inc and Fuelist, LLC to support its investment, professional and consulting expenses, as Pimovi and Fuelist are still in the development stage, as well as continued operational losses unrelated to Pimovi and Fuelist. Cash used for operations increased by $362,602, or approximately 82% during the first nine months of 2013, compared to the same period in 2012, primarily related to the continued funding of cash to Pimovi, Inc to support its investment, professional and consulting expenses, as Pimovi is still in the development stage, as well as continued operational losses unrelated to Pimovi. Cash provided by financing activities increased $16,200, or approximately 100% during the first nine months of 2013, compared to the same period in 2012, solely related to the cash contributions received by Fuelist from its other members. EQUITY FINANCING: As of September 30, 2013, our stockholders have contributed $3,864,613 in total equity financing to date. We do not anticipate that significant equity financing will take place in the foreseeable future. CONTRACTUAL OBLIGATIONS On February 25, 2013, the Company entered into a 12 month agreement with a new investor relations consultant, which pays the consultant a fee of $9,000 monthly for the period from February 2013 through July 2013. In addition, the Company granted 1,000,000 shares of common stock to the consultant upon execution of the agreement. The Company recognized $27,500 in consulting fees related to this agreement for the quarter ending September 30, 2013 and also still has $38,000 in prepaid expenses in current assets as of September 30, 2013. CRITICAL ACCOUNTING POLICIES The Securities and Exchange Commission (the "SEC") recently issued "FINANCIAL REPORTING RELEASE NO. 60 CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide additional disclosures, discussion and commentary on those accounting policies considered most critical to its business and financial reporting requirements. FRR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results of operations, and requires significant judgment and estimates on the part of management in the application of the policy. For a summary of the Company's significant accounting policies, including the critical accounting policies discussed below, please refer to the accompanying notes to the financial statements provided in this Quarterly Report on Form 10-Q. 18
NATURAL GAS AND OIL PROPERTIES In January 2010, the Financial Accounting Standards Board issued ASU 2010-03 to align the oil and gas reserve estimation and disclosure requirements of Extractive Industries -- Oil and Gas Topic of the Accounting Standards Codification with the requirements in the SEC's final rule, "MODERNIZATION OF THE OIL AND GAS REPORTING REQUIREMENTS". We implemented ASU 2010-03 as of December 31, 2009. Key items in the new rules include changes to the pricing used to estimate reserves and calculate the full cost ceiling limitation, whereby a 12-month average price is used rather than a single day spot price, the use of new technology for determining reserves, the ability to include nontraditional resources in reserves and the ability to disclose probable and possible reserves. Management has elected not to include probable and possible reserves in its reserve studies and related disclosures. The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various fields make these estimates generally less precise than other estimates included in the financial statement disclosures. INCOME TAXES As part of the process of preparing the consolidated financial statements, we are required to estimate federal and state income taxes in each of the jurisdictions in which Chancellor operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as derivative instruments, depreciation, depletion and amortization, and certain accrued liabilities for tax and accounting purposes. These differences and our net operating loss carry-forwards result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess, using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. Generally, to the extent Chancellor establishes a valuation allowance or increases or decreases this allowance in a period, we must include an expense or reduction of expense within the tax provision in the consolidated statement of operations. Under accounting guidance for income taxes, an enterprise must use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (i) the more positive evidence is necessary and (ii) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or all of the deferred tax asset. Among the more significant types of evidence that we consider are: * taxable income projections in future years; * whether the carry-forward period is so brief that it would limit realization of tax benefit; * future sales and operating cost projections that will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures; and * our earnings history exclusive of the loss that created the future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition. If (i) oil and natural gas prices were to decrease significantly below present levels (and if such decreases were considered other than temporary), (ii) exploration, drilling and operating costs were to increase significantly beyond current levels, or (iii) we were confronted with any other significantly negative evidence pertaining to our ability to realize our NOL carry-forwards prior to their expiration, we may be required to provide a valuation allowance against our deferred tax assets. As of September 30, 2013, a deferred tax asset of $483,404 has been recognized but partially offset by a valuation allowance of approximately $479,864 due to federal NOL carry-back and carry-forward limitations. BUSINESS COMBINATIONS The Company accounts for business combinations in accordance with FASB ASC Topic 805 "BUSINESS COMBINATIONS". This standard modifies certain aspects of how the acquiring entity recognizes and measures the identifiable assets acquired, the liabilities assumed and the goodwill acquired in a business combination. Net assets acquired must be recorded upon acquisition at their estimated fair values. Fair values must be determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases the determination of fair values of net assets requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Also often times these fair value estimates are considered preliminary at acquisition date, and are subject to change for up to one year after the closing date of the acquisition if any 19
additional information relative to closing dated fair values becomes available. On August 15, 2013, the Company entered into a business combination with The Fuelist, LLC (See Note 9 for earlier disclosure). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash equivalents have original maturities of six months or less. Our interest income is sensitive to changes in the general level of U.S. interest rates. Due to the short-term nature of our investments, we believe that there is not a material risk exposure. Credit Risk - Our accounts receivables are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result we do not anticipate any material losses in this area. Commodity Price Risk - We are exposed to market risks related to price volatility of crude oil and natural gas. The prices of crude oil and natural gas affect our revenues, since sales of crude oil and natural gas comprise all of the components of our revenues. A decline in crude oil and natural gas prices will likely reduce our revenues, unless we implement offsetting production increases. We do not use derivative commodity instruments for trading purposes. The prices of the commodities that the Company produces are unsettled at this time. At times the prices seem to be drift down and then either increase or stabilize for a few days. Current price movement seems to be slightly up but with the prices of the traditionally marketed products (gasoline, diesel, and natural gas as feed stocks for various industries, power generation, and heating) are not showing material increases. Although prices are difficult to predict in the current environment, the Company maintains the expectation that demand for its products will continue to increase for the foreseeable future due to the underlying factors that oil and natural gas based commodities are both sources of raw energy and are fuels that are easily portable. ITEM 4. CONTROLS AND PROCEDURES As supervised by our Board of Directors and our principal executive and principal financial officer, management has established a system of disclosure controls and procedures and has evaluated the effectiveness of that system. Based on the evaluation of our controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) required by paragraph (b) of Rule 13a-15, our principal executive and financial officer has concluded that our disclosure controls and procedures, as of September 30, 2013, are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (x) accumulated and communicated to management, including our principal executive and financial officer, as appropriate to show timely decisions regarding required disclosure and (y) recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 31, 2011, Dennis Caldwell filed a lawsuit against Chancellor's subsidiary, Gryphon Production Company, LLC, in the 223rd District Court of Gray County, Texas, for an alleged breach of the April 1, 2007, purchase and sale agreement between Gryphon and Caldwell Production Co., Inc. Caldwell contended that Gryphon did not pay for the oil in the storage tanks in the April 2007 transaction. The plaintiff alleged breach of contract, conversion and fraud and sought damages of $451,999 as contract damages, pre-judgment and post-judgment interest, exemplary damages, attorney fees, and court costs. On March 8, 2013, the Judge of the 223rd District Court entered Final Judgment that Caldwell takes nothing by his suit. Caldwell filed a motion for new trial. The motion for new trial has since been overruled by operation of law. Thereafter, Caldwell filed a "conspiracy" suit against Gryphon and other oil companies, in the 223rd District Court of Gray County, Texas, alleging that certain mistaken payments by Exxon to Caldwell were made to harm Caldwell. On July 29, 2013, the Judge of the 223rd District Court granted Gryphon's motion to dismiss the case under Texas' baseless cause of action rule, and ordered Caldwell to pay Gryphon's attorney fees and costs in the amount of $4,880.00. Caldwell filed a motion for new trial, and paid the $4,880.00 to Gryphon. 20
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table sets forth the sales of unregistered securities since the Company's last report filed under this item. Principal Total Offering Price/ Date Title and Amount(1) Purchaser Underwriter Underwriting Discounts ---- ------------------- --------- ----------- ---------------------- August 19, 2013 2,000,000 shares of common stock The Fuelist, LLC NA $0.078/NA (1) On August 15, 2013, Chancellor Group, Inc. entered into a binding term sheet with The Fuelist, LLC, a California limited liability company ("Fuelist"), and its founders, Matthew Hamilton, Eric Maas and Thomas Rand-Nash (together, the "Founders"), pursuant to which Chancellor agreed to acquire a 51% ownership interest in Fuelist. As consideration for the ownership interest, Chancellor will contribute to Fuelist a total of $271,200 in cash payable in 12 monthly installments of $22,600, beginning in August 2013. As additional consideration for the ownership interest, Chancellor contributed a total of 2,000,000 shares of newly issued common stock to Fuelist on August 19, 2013. ITEM 6. EXHIBITS 10.1 Binding Term Sheet for Investment in The Fuelist, LLC, dated August 15, 2013 (incorporated by reference to Exhibit No. 10.1 to the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 20, 2013). 31 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of The Sarbanes Oxley Act of 2002.* 32 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** SEC Ref.No. Title of Document ------- ----------------- 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Label Linkbase Document 101.PRE XBRL Taxonomy Presentation Linkbase Document ---------- * Filed herewith. ** Furnished herewith. SIGNATURES Pursuant to the requirements of Section 12(g) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 14, 2013. CHANCELLOR GROUP, INC. By: /s/ Maxwell Grant ------------------------------------- Maxwell Grant Chief Executive Officer and Principal Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on November 14, 2013. By: /s/ Maxwell Grant ----------------------------------------- Maxwell Grant, Chief Executive Officer 21
EXHIBIT INDEX 10.1 Binding Term Sheet for Investment in The Fuelist, LLC, dated August 15, 2013 (incorporated by reference to Exhibit No. 10.1 to the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 20, 2013). 31 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of The Sarbanes Oxley Act of 2002.* 32 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** SEC Ref.No. Title of Document ------- ----------------- 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Label Linkbase Document 101.PRE XBRL Taxonomy Presentation Linkbase Document ---------- * Filed herewith. ** Furnished herewith